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06BANGKOK3354 DELAY IN FTA TALKS LIKELY TO HIT US EXPORTS

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“66574”,”6/5/2006 0:59″,”06BANGKOK3354″,

“Embassy Bangkok”,”CONFIDENTIAL”,””,”VZCZCXRO7149

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SIPDIS

 

SIPDIS

 

DEPARTMENT PASS USTR FOR BWEISEL AND JJENSEN

COMMERCE FOR JBENDER AND JKELLY

 

E.O. 12958: DECL: 06/01/2016

TAGS: ETRD, EINV, ECON, TH

SUBJECT: DELAY IN FTA TALKS LIKELY TO HIT US EXPORTS

 

Classified By: Economic Counselor Michael J. Delaney. Reason: 1.4 b an

d d

 

1. (C) Summary. There is a growing possibility that

US-Thailand Free Trade Agreement (FTA) negotiations will be

indefinitely postponed. The sizable opportunity costs for US

commerce of the FTA\’s failure have been documented in several

econometric studies of the FTA\’s likely effects: foregone US

exports are estimated to total around US$390 million per

year, or US$3.9 billion over a 10-year period. Less well

recognized is the likely cost to US commerce caused by trade

diversion to non-US suppliers that have already negotiated

much lower tariffs into the Thai market. Thailand has

already finalized (or, we believe, soon will finalize) FTAs

with some of its key trading partners, so an indefinite

postponement of the FTA with the US will place a substantial

percentage of our existing trade with Thailand at a

double-digit tariff disadvantage — US suppliers will face

average effective tariffs of 16 percent for agricultural

products, and 23 percent for industrial products, versus

mostly zero tariffs for our competitors. About 75 percent of

current US exports to Thailand overlap with products covered

by Thailand\’s FTAs with other countries. Based on 2005

volumes and value, we estimate US$60.5 billion in US

agricultural and industrial exports over the next ten years

will be at risk due to trade diversion to FTA-covered

suppliers from Japan, China, Australia, and New Zealand.

 

2. (C) There is evidence that FTA-induced trade diversion

away from US suppliers is already occurring, and is likely to

worsen over the next few years as Thailand\’s FTAs with our

competitors are fully implemented. End Summary.

 

FTA Talks Could Be Delayed Indefinitely

 

3. (C) Thailand\’s political stalemate continues. The Thai

courts have ruled that the April 2 elections were not

constitutional, so the previous government remains in

caretaker status. New elections eventually will have to be

held, but apparently not until mid-October owing to continued

legal and political wrangling. Thus, the current state of

political limbo will through 2006, making the resumption of

FTA talks with the US ever more problematic given the US\’s

own scheduling constraints (TPA expiration, resources

requirements of other FTAs). Further lengthening the odds of

successful conclusion of the FTA is the reality that, at

least in the short term, any future Thai government may shy

away from re-engaging on the FTA. The FTA is politically

controversial and unpopular here, and may be relegated to the

\”too hard\” category by an incoming (possibly fragile)

government.

 

4. (C) Commerce Vice Minister Uttama Savanaya (who is

Deputy Prime Minister and Commerce Minister Somkid\’s personal

representative in the FTA talks) told us recently that he

does not believe a future government would be in a position

to undertake any major policy initiatives in the short term,

including the resumption of FTA negotiations. Minister

Somkid himself on May 26 told the Ambassador that while he is

anxious to resume FTA negotiations once an elected government

is in place (Somkid estimated that a government could be

formed by December 2006), he warned that FTA talks \”cannot

resume along the same lines as before.\” Although he did not

provide details, we believe Somkid is prepared to negotiate a

narrow, market access for goods FTA modeled (we believe) on

Thailand\’s FTA with Japan. The FTA would be \”phased,\” with

most non-tariff issues being left for later. (Comment:

Somkid\’s and Uttama\’s latest comments are consistent with

what they have been saying for some time. Somkid is in favor

of market liberalization in principle, but has since 2004

confided to other Thai Government officials his doubts that

Thailand could accommodate the US requirement for a

comprehensive FTA Somkid\’s lack of enthusiasm for the FTA

left PM Thaksin as its only strong Thai proponent, and played

a role in the subsequent problems the FTA talks encountered.

Somkid probably calculates that a comprehensive, US-style FTA

is more than the fragile Thai political system can handle

right now. End Comment.)

 

Opportunity Costs Under a No-FTA Scenario

 

5. (C) Given the current politics and attitudes here,

 

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combined with US scheduling and resources constraints, there

is a growing possibility that there will be no comprehensive

US-Thailand FTA for the foreseeable future. We have examined

how this \”No FTA\” scenario would affect future US exports to

Thailand, as well as Thai exports to the US. In a sense,

such a calculation has already been done in the several

econometric studies of the effects of an FTA on bilateral

trade volumes and GDP growth. (See, for example, the USITC\’s

\”US-Thailand Free Trade Agreement: Advice Concerning the

Probable Economic Effects of Providing Duty-Free Treatment

for Imports:, dated August 2004; and the Thai Development

Research Institute\’s \”A Study on the Impacts of a Thailand-US

Free Trade Agreement\”, dated October 9, 2003.) These studies

typically take as a baseline the existing trade regimes of

the two economies, and calculate the trade effects of full

market liberalization, i.e., the elimination of all tariffs

and most non-tariff barriers. The result of that calculation

of \”baseline trade flow versus trade flow under a

liberalized, post-FTA regime\” is the economic benefit of the

FTA (the result can be readily converted into annual GDP

growth, employment generation, or other measurements).

Conversely, that same result would be the \”opportunity cost\”

of not having an FTA. According to these econometric

studies, these opportunity costs would be commercially

significant: the FTA would boost US GDP by about 0.1 percent

over a ten-year period (US$11.75 billion), and boost US

exports to Thailand by about 4.7 percent annually (i.e.,

US$390 million per year, or US$3.9 billion over a 10-year

period).

 

Trade Diversion Effects Under a No-FTA Scenario

 

6. (C) Less well documented is the likely damage to

existing bilateral trade if the FTA is indefinitely

postponed. If we want to know the true cost to US commerce

of an indefinite delay of our current FTA initiative with

Thailand, earlier econometric analyses are incomplete since

the existing bilateral trade regime — the \”baseline\” — is

changing in important ways that are likely to cause trade

diversion from US exports. Trade diversion effects are

relatively high for Thailand because Thailand\’s MFN tariffs

are relatively high. In the absence of an FTA with the US,

Thailand\’s FTAs with other countries will place at risk most

(about 75 percent) existing US exports to Thailand. Perhaps

the most important change for US exporters is Thailand\’s

current or imminent implementation of FTAs with Australia,

New Zealand, China, and Japan. FTAs with Australia and China

have been signed and are already in effect; the FTA with

Japan has been finalized and awaits signing.

 

7. (C) In general, Thailand\’s non-US FTAs cover market

access, particularly tariff reduction/elimination, for

varying product (goods) categories. In most cases, the

FTA-covered product tariffs go to zero after a phase-in

period. That will give these countries a significant price

advantage over the US, since Thailand\’s current effective MFN

tariffs average about 16 percent for agricultural products

and 23 percent for industrial products. Over time, trade

diversion to these lower tariff suppliers is likely.

 

Future US Services Investments Could Also Be Negatively

Impacted

 

8. (C) Under the US-Thailand Treaty of Amity and Economic

Relations (AER), US investors enjoy preferential,

better-than-MFN treatment for a range of services investments

in Thailand. Thailand\’s 10-year GATS derogation permitting

this arrangement expired in January 2005. AER rights

currently are being extended by 90-day intervals pending

successful completion of the FTA. The perception that

Thailand\’s FTA negotiations with the US are on more or less

indefinite hold would increase pressure on Thailand to

withdraw benefits to US investors that are provided under the

AER.

 

9. (C) Thailand\’s exports to the US also face

uncertainties. The implementation of CAFTA and other FTAs

poses a competitive threat. Another question mark is the

future of the US Generalized System of Preferences (GSP).

Thailand currently is the third-biggest beneficiary of the

GSP, with about one-third (more than $5 billion worth) of

Thailand\’s exports to the US enjoying GSP tariff-free

 

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treatment. With the current GSP program scheduled to expire

at the end of 2006, some US policymakers have expressed the

desire to revamp the program, spreading out the benefits to

more countries and focusing more on the least developed

economies, that is, away from a middle income country like

Thailand.

 

Thailand\’s FTA with Australia

 

10. (C) The Thailand-Australia FTA (TAFTA) entered into

force on January 1, 2005. The agreement focuses on market

access, particularly tariff reduction. Thailand will phase

out its tariffs on some 2,934 tariff items, around 53 percent

of all items, accounting for 78 percent of current Thai

imports from Australia. Of these, only 206 items were

previously duty free. A further 41 percent of Thai tariffs

will be phased to zero by 2010. These items cover 17 percent

of current trade. All remaining tariffs, including tariff

rate quotas, will phase to zero in 2015 or 2020 (with the

exception of skim milk powder and liquid milk and cream, for

which the tariff rate quotas will be eliminated in 2025).

 

Agricultural Products

 

11. (C) For agricultural products subject to tariff rate

quotas prior to January 1, 2005, Thailand has either

eliminated the tariff and quota restrictions or will expand

access for Australia over a transition period varying

according to the product, before final elimination of the

tariff rate quota.

 

12. (C) Meat — Thailand will phase the current 32% tariff

for sheep meat to zero in 2010. Thailand immediately reduced

the tariff on beef to 40 percent, down from 51 percent, and

for beef offal to 30 percent, down from 33 percent, and will

phase these rates to zero in 2020. Thailand will phase the

current 33 percent tariff for pork to zero in 2020. (Note:

The cited pre-FTA tariff rates are applied on an MFN basis

and, as such, are the tariff rates applied to US imports.)

 

13. (C) Dairy — Thailand immediately eliminated the

previous tariffs on infant formula (5 percent), lactose (up

to 2 percent), casein and milk albumin (10 percent), and will

phase the tariffs on butter fat, milkfood, yoghurt, dairy

spreads and ice cream to zero in 2010. The FTA provided an

immediate additional quota for Australia of 2,200 tons for

skim milk powder and 120 tons for liquid milk and cream,

expanding by 17 percent at five-yearly intervals until 2025,

when all tariffs and quotas will be eliminated. It will

phase the tariffs for butter and cheese, other milk powders

and concentrates to zero in 2020.

 

14. (C) Grains and related products — Thailand immediately

eliminated the previous tariffs on wheat (ad valorem

equivalent of 12-20 percent), barley, rye and oats (ad

valorem equivalents of up to 25 percent), and the tariff and

tariff rate quota on rice. It also immediately eliminated

the tariffs on unroasted malt (ad valorem equivalent of 28

percent) and wheat gluten (31 percent), and will phase the

tariffs on wheat flour (32.6 percent) and starch (31 percent)

to zero in 2010.

 

15. (C) Fruit and Vegetables — Thailand will phase

tariffs on most fresh fruit and vegetables (current rates

mostly 33 percent or 42 percent) to zero in 2010. Tariffs on

mandarins (42 percent) and grapes (33 percent) were

immediately reduced to 30 percent, and will be phased to zero

in 2015. Thailand immediately eliminated its tariffs on

most tropical fruit, and provided immediate additional quota

for fresh potatoes, expanding yearly until 2020, when all

tariffs and quotas will be eliminated. The current 30

percent tariffs for processed potatoes will be phased to zero

in 2015.

 

16. (C) Thailand immediately reduced to 24 percent the

previous tariffs of 30 percent on fruit juices and canned

fruit, and will phase the tariff to zero in 2010. The

previous 30 percent tariffs on canned mixed fruit and canned

pineapple were eliminated immediately.

 

17. (C) Sugar — Thailand provided immediate additional

quota for sugar, expanding annually by 10 percent, with

 

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tariff and quota free access in 2020.

 

18. (C) Wine, Beer and Spirits — Thailand immediately

reduced its previous 54 percent tariffs on wine to 40

percent, and will phase the tariff to zero in 2015. For beer

and spirits, Thailand immediately reduced its previous

tariffs of 60 percent to 30 percent, before phasing to zero

in 2010.

 

19. (C) Other Processed Foods — Thailand immediately

eliminated its previous 10 percent tariffs on chocolate

confectionery, and will phase its current 30 percent tariff

on sugar confectionery to zero in 2010. For bakery

products, Thailand will mostly phase current tariffs of 25-30

percent to zero in 2010, with immediate elimination of

tariffs on crispbread and some cereals.

 

20. (C) Other Agricultural Products — Thailand

immediately eliminated its previous tariffs of up to 10

percent on hides and skins. Thailand immediately eliminated

its previous 1 percent tariff on wool and will bind its

tariff on cotton at zero.

 

Industrial Products

 

21. (C) On entry into force, Thailand reduced tariffs on

any industrial goods not subject to immediate elimination to

a ceiling of no more than 20 percent (with the exception of

small and medium passenger motor vehicles), before phasing to

zero. (Pre-FTA industrial effective tariff rates average

about 23 percent.) Where not eliminated immediately, tariffs

on a range of industrial goods identified by Australia as of

specific interest were halved immediately before phasing to

zero.

 

22. (C) Motor Vehicles and Components — Thailand

immediately eliminated tariffs on large passenger motor

vehicles (engine capacity of over 3000cc) and goods vehicles,

previously at 80 percent and 60 percent respectively. For

other passenger motor vehicles, Thailand immediately reduced

the previous 80 percent tariff to 30 percent, before phasing

this down by 6 percent each year to zero in 2010. Tariffs on

all automotive parts, components and accessories, previously

up to 42 percent, were immediately reduced to a ceiling of 20

percent, and will be phased to zero by 2010. Tariffs on

engines were immediately reduced from the previous 30 percent

to 15 percent. Other tariffs previously at or below 20

percent were also immediately reduced and phased down

accordingly.

 

23. (C) Machinery and Equipment — Prior to January 1,

2005, Thai tariffs ranged up to 30 percent. Tariffs were

either immediately eliminated or will be phased to zero by

2010, with the exception of three tariffs covering electric

power boards, which will be eliminated in 2015. Tariffs of

20 percent for electric transformers and inductors were

eliminated immediately. Tariffs of 30 percent for

fully-automatic washing machines and combined

refrigerator-freezers were eliminated immediately.

 

24. (C) Steel — Thailand immediately eliminated its 1

percent tariff on slab steel. Thailand immediately halved

its tariffs on flat-rolled steel products of interest to

Australia, including hot-rolled coil (previous tariff of 10

percent), cold-rolled coil (12 percent) and coated steel (15

percent). Tariffs will then be eliminated in 2015, with the

exception of most coated steel products for which the tariffs

will be phased to zero in 2008.

 

25. (C) On long steel products, Thailand will generally

reduce tariffs to zero by 2010. On a limited number of

products, including structural sections and merchant bar,

Thailand immediately halved tariffs, which will then be held

until elimination in 2015. On steel articles, where

Thailand\’s previous tariffs were generally 20 percent,

Thailand eliminated some tariffs immediately, with the

remainder to be phased to zero by 2010.

 

26. (C) Non-ferrous metals — On unwrought copper cathode,

Thailand will eliminate the tariff in 2010, prior to that

Thailand will bind the rate at no more than 5 percent, and

will apply a tariff of no higher than the rate applied to its

 

BANGKOK 00003354 005 OF 008

 

ASEAN partners. On copper bars and pipes, with previous

tariffs of 10 percent, Thailand either eliminated the tariff

immediately or reduced it immediately to 5 percent and will

eliminate it in 2007. On aluminum bar, sheet and foil, with

previous tariffs of 10 percent, Thailand reduced immediately

to 5 percent the tariff on items of specific interest and

will eliminate it in 2007, while remaining tariffs will phase

to zero in 2009. Thailand immediately eliminated its 1

percent tariff on unwrought aluminum. On unwrought lead and

zinc, with previous tariffs of 10 percent, Thailand either

eliminated the tariff immediately or reduced the tariff

immediately to 5 percent and will eliminate it in 2007.

 

27. (C) Pharmaceuticals — Thailand will phase current

tariffs of 10 percent or 20 percent to zero in 2009. On

products of specific interest, previous tariffs of 10 percent

were halved immediately and will be eliminated in 2007.

 

28. (C) Fertilizers — Thailand immediately eliminated

previous fertilizer tariffs at 5 percent, and immediately

halved previous tariffs of 10 percent before elimination in

2007.

 

29. (C) Photographic Goods — Thailand immediately

eliminated tariffs of 20 percent on photographic film, paper

and chemicals.

 

30. (C) Plastics — Thailand immediately reduced tariffs

of 30 percent on plastic articles to 20 percent and will

phase to zero in 2010. For the most significant item of

current trade, miscellaneous plastic articles, not separately

identified in the tariff schedule, Thailand immediately

eliminated the previous 30 percent tariff. Thailand will

phase the current tariffs of up to 20 percent on polymers to

5 percent in 2008 and to zero in 2010.

 

31. (C) Other Goods — Thailand immediately eliminated the

previous tariff of 10 percent on golf club parts; immediately

eliminated the previous tariff of 20 percent on parts of

seats; immediately eliminated the previous tariff of 20

percent on ferries under 1,000 tons, and will bind the

current zero tariff on ferries of over 1,000 tons.

 

Thailand\’s FTA with New Zealand

 

32. (C) Thailand\’s FTA with New Zealand is similar in key

respects to that of Australia\’s. New Zealand is a major

supplier of dairy products and meat to Thailand. Trade

diversion away from US suppliers to New Zealand competitors

is likely to occur, but will be mitigated by supply

constraints in New Zealand.

 

Thailand\’s FTA with China

 

33. (C) Thailand\’s FTA with China is fairly narrow,

focusing on reciprocal \”early harvest\” tariff reductions in a

limited range of agricultural products. Starting in 2004,

tariffs are phased to zero by 2006 for the following

products: live animals (Thailand\’s current applied MFN tariff

rate is 10.5 percent); meat and edible meat offal (35.4

percent); fish and crustaceans (5 percent); dairy products

(23.3 percent); products of animal origins (12.5 percent);

live trees and other plants (33.2 percent); edible

vegetables, roots, and tubers (35.4 percent); and edible

fruits and nuts (32.4 percent).

 

Likely Trade Diversion Costs for US Exporters by Sector

 

34. (C) Fruit — China,s fruit exports have surged since

the signing of the Sino-Thai zero-for-zero accord covering

fruits and vegetables. Fortunately for US suppliers, total

market size increased and US net exports were not displaced

(for now). Imports from China have been on the upswing over

the past five years, rising from US$19 million in 2000 up to

US$63 million in 2005. Meanwhile, US exports have been flat

at around US$18 million annually for the past five years.

Australia and New Zealand started off with about US$4 million

(combined) five years ago and are now up to US$7 million in

2005, just prior to the kick-off of their FTA-mandated

reduced tariffs. Combined competitive pressure from China,

Australia and New Zealand could reduce the competitiveness of

US fruit in this market. Currency devaluation, however,

 

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might discount US fruit enough to offset this.

Unfortunately, freight disadvantage for US products will be

exacerbated by high fuel costs, perhaps trumping both

currency values and tariff offsets.

 

35. (C) We project that US fruit exports to Thailand will

taper off as Australia and New Zealand displace US apples,

cherries, peaches, plums, and berries. US exports will fall

by about US$3 million in 2007, and another US$1 – 2 million

in 2008.

 

36. (C) Nuts — Australia,s nut exports to Thailand have

boomed since 2001, jumping from less than US$100,000 then to

over US$600,000 in 2005. Tariff reductions and high quality

from Australia will only further increase the competitiveness

of Australian tree nuts (as opposed to ground nuts). China

will, of course, elbow the US out of some business; the

question is just how much. US nut exports to Thailand were

very strong up to 2005, racking up some $8 million that year.

Given the substitutability of U.S. nuts by Australian ones,

look for US nut exports to suffer, probably coming down half

a million annually, as long as Australia has the supply.

 

37. (C) Wine — US market share in Thailand has dropped

steadily over recent years. Australia tops the list of

suppliers, providing plentiful supplies, affordable prices,

reasonable quality, and low shipping costs. New Zealand is

creeping up the ranks, showing that it can pull in over 1

percent of the market with its tiny exports and high demand

for its quality wines in higher purchasing power markets.

Look for the paltry US$150,000 exports of US wine to Thailand

to stay flat. Any growth in the market will fall to the

Australians or Europeans.

 

38. (C) Beef — Thailand is a tiny beef market, buying less

than US$5 million annually from all sources. The unfortunate

find of BSE in the US meant that American beef exports

collapsed in 2004 and 2005. New Zealand and Argentina took

up most of the slack (Australia was topped out and could not

muster the export muscle.) The US is currently battling back

to regain market share in Thailand. Tariff disadvantages

compared to antipodean origin meat will only serve to make

the comeback more difficult. It is hard to isolated losses in

the meat market due solely to BSE (mad cow) or to price /

tariff disadvantages, but either way, US beef is headed for a

protracted fight in Thailand. The best-case scenario is that

US beef makes it way back to US$1 million annually.

Australia, New Zealand, and Argentina will take the lion,s

share. Without negative tariff pressure caused by the FTAs

with Australia and New Zealand, US beef would easily regain

it former position in the market.

 

39. (C) Dairy Products — New Zealand has grown its

presence in the Thai market through aggressive marketing and

attractive prices. Australia is right on their heels. The

US has recently become competitive due mostly to domestic

pricing restructuring. This segment of the market is

particularly price conscious, given that quality and

availabilities are largely the same from the major suppliers.

More so than in other product categories, tariff reductions

on Southern Hemisphere dairy products ought to play out in

higher export numbers, too. Look for US losses in this

category, possibly as much as US$5 million a year due to

lower tariffs for Australian and New Zealand suppliers.

 

40. (C) Pet Food — Of the US$20 million or so in pet food

that enters Thailand annually, over half comes from

Australia. The US has held steady at just over 30 percent of

the market. Many US manufacturers have production facilities

in Australia and will easily be able to shift resources to

Australia to follow the demand from markets like Thailand.

Look for direct and proportional market losses as tariffs

drop for Australian and New Zealand suppliers.

 

41. (C) Hides and Skins — This is a huge market segment

for the US, racking up some US$50 to US$75 million annually.

Closely related to the beef slaughter industry, hides and

skin exports to Asia (Thailand, Philippines, and Korea) have

been very strong due mainly to strong supplies and stable,

attractive prices. With very few quality differences among

suppliers, it is reasonable to assume that Australia and New

Zealand will be able to erode the US share as tariffs on

 

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their product decline. In 2005, US exports were about US$55

million compared to the combined Australia/NZ volume of about

US$45 million.

 

42. (C) Thailand imports around US$2.8 billion in food and

agricultural products annually. To this can be added a few

more tens of millions for lumber and fiber. The US has been

the leading supplier of agricultural products to Thailand,

sending in around half a billion worth of products in 2005.

Australia is rising in importance as a supplier, reaching the

number 5 position with about US$200 million in exports to

Thailand that same year.

 

43. (C) Much of the US export power in the Thai market is

due to dominance in soybean, wheat and cotton trade ) areas

where Australia cannot erode the US position or where the FTA

will not provide any incentive to switch from US to Aussie

supply. The US vulnerability comes in the areas beyond farm

commodities in their &pure8 sense. The US vulnerability is

in product categories where tariffs are higher, and where

reasonable substitutes are available (processed food

products, semi-finished foods like frozen French fries,

consumer ready products such as juices, cereals, as well as

the perishable and high cost products like fruits,

vegetables, etc.)

 

44. (C) If one were to take the so-called bulk commodities

out of the US mix, that would leave about half of the value

in value-added and consumer ready products, that area most

vulnerable to Aussie (and other FTA) erosion. Of these

approximately US$250 million &at risk8 exports, look for a

gradual wearing away of the US numbers as tariff preference

shifts to our Southern competitors. The deterioration of

market share will likely be accelerated due to rapidly rising

freight costs, too (with Australia and NZ enjoying relative

freight advantages over the US). Therefore, we believe the

value of US agricultural exports to Thailand will shrink

continually over the next decade, losing perhaps as much as

half of their current value due to lack of competitiveness.

 

Thailand\’s FTA With Japan: Focus is on Industrial Goods

 

45. (C) Thailand\’s FTA with Japan poses the biggest threat

to US exports of industrial goods. The FTA with Japan has

been finalized, but remains unsigned. Thai officials have

told us that they regard the signing of the FTA with Japan as

fairly likely in the near future, notwithstanding the current

political impasse in Thailand. Their optimism derives from

the recognition that unlike the FTA with the US, the FTA with

Japan has been completed and only needs to be signed.

Furthermore, it has not attracted the same popular attention

and controversy as has the FTA with the US (probably because

it focuses almost exclusively on non-agricultural tariffs).

The FTA text is not publicly available. However, Japanese

diplomats in Bangkok have told us that the FTA is heavily

oriented toward phased reduction/elimination of tariffs on

industrial goods. We believe the FTA text calls for

implementation (including phased tariff reduction and

elimination upon full FTA implementation) to begin January

2007.

 

46. (C) Thailand\’s MFN effective tariffs for manufactured

goods currently average about 23 percent. The US and Japan

are direct competitors across a range of products in the Thai

market: of the top twenty categories of US exports to

Thailand, eleven are also included in the top 20 list of

Japanese exports to Thailand. The categories in which the US

competes directly with Japan comprise better than 78 percent

of total US exports to Thailand. Upon full implementation,

Japanese industrial goods are likely to face de minimus

tariffs, while US goods will face the average effective

tariff rate of 23 percent. As the FTA\’s tariffs are phased

in (in most cases to zero), US products will gradually lose

their price competitiveness against substitutable Japanese

products.

 

Total Value of US Exports At Risk Due to FTA-Induced Trade

Diversion

 

47. (C) The twin effects of agricultural product trade

diversion from Australia/New Zealand/China, and industrial

product trade diversion from Japan, is likely to severely

 

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impact US exports to Thailand. Once these FTAs are fully

implemented, US exporters will have to overcome a

double-digit tariff disadvantage. The lack of an FTA with

Thailand would put at risk at least US$1.25 billion (based on

2005 values and volumes) in US agricultural exports over the

next ten years. Upon full implementation of the FTA with

Japan, we estimate that about US$59 billion (based on 2005

values and volumes) in US industrial exports over the next

ten years to Thailand will be at risk. Thus, about $60.5

billion (based on 2005 values and volumes), or about 75

percent of total US exports to Thailand, will be at risk once

all of Thailand\’s FTAs are fully implemented.

 

Trade Diversion Is Already Happening

 

48. (C) We use the relatively moderate term \”at risk\” to

characterize the impact on US suppliers, since it is

impossible to gauge the precise impact of differential

tariffs on US exports. Many issues besides differential

tariffs are at play, including availability of supply,

quality, cost and reliability of delivery, and proprietary

technology. It is likely that the effects of the US\’s tariff

disadvantage will vary from product to product.

 

49. (C) In terms of overall US exports to Thailand, will

tariff discrimination matter? Based on our examination of

preliminary data, the answer is an emphatic \”Yes.\”

FTA-mandated reduction in tariff rates is already having a

big impact on Thailand\’s import mix, skewing it toward FTA

countries. According to full-year Thai statistics,

Australian exports to Thailand grew by 47 percent in 2005,

compared to the US exports\’ growth of only 20 percent. Gold

and crude petroleum were the main contributors, but

Australian exports of wheat, aluminum, copper, zinc, lead,

automotive engines and parts, malt, dairy products,

electrical machinery and equipment, fruit and nuts, pet food

and pharmaceuticals also grew strongly.

 

50. (C) US exports of cereal (the 14th largest US export to

Thailand, HS code 10) increased 27 percent in 2005 compared

to the previous year, whereas Australia\’s increased 57

percent. US exports of pharmaceuticals (the 18th largest

category of US exports to Thailand) increased 17.9 percent in

2005 compared to 2004, whereas Australian exports increased

31.1 in the same period. Articles of iron and steel (HS code

73) was the 9th largest US export to Thailand by value in

2005 increasing 13.8 percent over 2004. Australia\’s exports

to Thailand in this category increased 90.3 percent over the

same period. These results are particularly troubling given

that Australia\’s FTA with Australia has not been fully

implemented; 2005 was only the first year of the FTA\’s

multi-year tariff phase-out schedule, i.e., tariffs for the

most part have not yet phased to zero. It could be that that

the worst is yet to come as the Australia versus US tariff

gap in the Thai market widens.

 

51. (C) Since the Thailand-Japan FTA has not been signed or

implemented, there is no hard data on how this FTA might

affect US exports. We note, however, that since Thailand\’s

effective tariff rates for industrial goods is higher than

its effective agricultural tariff rates (16 percent versus 23

percent), the trade diversion effect (in this case, away from

US suppliers, to Japanese suppliers) on US exports may be

greater than what we have seen for agricultural products with

the Australia FTA.

 

Conclusion

 

52. (C) The available import statistics present an

incomplete picture, and we are working with the American

Chamber of Commerce in Thailand to gain a fuller, more

detailed understanding of the likely impact on US exporters

of Thailand\’s FTAs with our competitors. But we already have

enough information to confidently project that the

combination of implementation of these FTAs and inaction on

the US FTA is likely to severely damage our overall

competitiveness in the Thai market, resulting in the loss of

a significant share of our current exports to Thailand.

 

BOYCE

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Written by thaicables

July 12, 2011 at 4:47 am

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